EKIP– Expert Club for Economics and Politics A Different Opinion
/Part 1 – The Free Market/
Throughout human history, politicians, philosophers and economists from all over the world have been searching for a formula for government that would make people richer. Historically, countless different approaches have been tried. Empirically, however, it has been proven that only those political ideologies and economic theories that promote the philosophy of free and independent actions of the individual lead to the generation of wealth in a society. Examples such as Singapore, Hong Kong and the huge difference in the standard of living of citizens of North and South Korea are a vivid and irrefutable example of this.
The individual maximizes the product of his labor only when he is left free to pursue his economic benefit. Freedom of action brings out the best in the individual, which in turn increases the well-being of the entire society and leads to economic, technological and social progress. Economic freedom includes the effective functioning of the free market, protection of private property, the rule of law and minimal state interference in purely market phenomena and processes.
How does the free market work?
The free market is a general term for the set of commercial transactions that take place in a society. Each transaction is undertaken as a voluntary agreement between two people or a group of people. These people or groups of people exchange two (or more) economic goods. The two parties to the transaction undertake it only in cases where both parties expect to derive economic benefit from it.
Two key factors determine the terms of any transaction. How highly each of the participants in it values each good object of the transaction and the trading skills of the participants. The parties to the transaction will repeat it in the future if each of them has achieved the expected economic effect from it. If for some reason one of the parties was not satisfied with it, then it will never be repeated in the future under the same terms and parameters. In this way, the free market naturally punishes unfair economic counterparties.
Another important element of the free market is finding the equilibrium price. If one of the parties to the transaction has not been able to achieve the expected economic result, it simply does not buy the relevant product at the offered price. In this way, thanks to the forces of demand and supply, the consumption of this good will fall, and hence its price. This decline in price will continue until it reaches levels at which entrepreneurs could make a profit. It is thanks to the price mechanism that the free market promotes economic efficiency, because it quickly corrects any erroneous pricing by its participants.
To work, the market must be free.
The economic efficiency that the free market leads to is possible to achieve only and only when the state does not intervene in it. That is, the individual must have the opportunity to trade completely freely, with whomever he wishes and under whatever conditions he decides are beneficial for himself. Absolutely any intervention by the state in the free market automatically leads to the distortion of the equilibrium price, and from there to the generation of imbalances in the economy. Unfortunately, politicians all over the world grossly interfere with the principles of the free market. From determining the price of interest rates, through determining the minimum prices of labor to introducing tariffs, duties and imposing economic sanctions. All of this is intervention by the state in the pricing of raw materials and finished products, which directly limits the freedom of the individual to make independent economic decisions.
One of the most important factors in creating economic freedom is the existence of an effectively functioning market and trade. The free market and the market mechanism make the products of businesses available to consumers around the world. It allows entrepreneurs to allocate productive resources in such a way that they can satisfy the future needs of consumers in the most efficient way possible. Without the existence of a free market, achieving economic efficiency is simply impossible.
What is "economic efficiency"?
Achieving economic efficiency in trade means that entrepreneurs manage to make a profit. The formation of profit, in turn, leads to the accumulation of capital, which can subsequently be reinvested in machinery and equipment that will increase labor productivity, and hence the income and standard of living of the entire society. The increase in people's incomes, in turn, leads to the generation of savings in the economy. These savings are available to entrepreneurs for investment in investment projects. The free market not only stimulates the level of knowledge in an economy, but, equally important, the price mechanism and the incentives of profit and loss direct capital and production into investments with the greatest added economic value.
That is, in sectors of the economy that entrepreneurs consider undervalued and see opportunities for higher revenues and profit margins. Another key positive of the free market is that it naturally punishes entrepreneurs who are unable to provide goods and services that they can sell on the free market. The accumulation of losses leads to their inevitable bankruptcy, which allows entrepreneurs who manage to make a profit on the free market to acquire those assets that were previously not managed in a sufficiently efficient manner. In this way, the free market organically leads to economic efficiency, because capital assets quickly pass from unsuccessful managers to the management of successful ones.
As I write this article, Donald Trump has made his first fatal economic policy mistake by blatantly interfering with the principles of the free market, imposing a 25% tariff on steel imports and a 10% tariff on aluminum imports. Such a measure represents a return to the economic policy of Mercantilism. Dominating economic thought during the period from the 16th to the 18th centuries, this economic theory is based on the false assumption that economic regulations, high import tariffs, protectionism, subsidies, and a positive trade balance will inevitably lead to economic growth.
The Fatal Fallacies of Mercantilism and State Intervention
The brilliant pro-market economists, such as Adam Smith, David Ricardo, Frederic Bastiat and Jean Baptiste Say, in an irrefutable way prove that free trade is perhaps one of the most important factors that make nations richer. Moreover, any regulations that lead to the restriction of the economic freedom of the individual to trade in short limit economic growth and make people poorer. The freedom of the individual to trade with whom he judges to generate the highest profit at the lowest risk is of fundamental importance for the effective functioning of the free market. Whenever the state intervenes in these complex market processes, this leads to deep imbalances.
Donald Trump's economic policy of restricting free trade is nothing more than state aid to the steel lobby. What is visible is that through these tariffs Trump aims to save the dying steel sector of the US. What is invisible, however, is that such a policy will in turn have a negative effect on other sectors of the economy, which will not be able to pass on the increase in the steel price to consumers. The end result is always a decline in investment, consumption and employment in the sector in which the state intervenes. In other words, what the state is trying to stimulate through its intervention will be hit hard.
We are actually seeing a rise in taxes on all Americans in order to protect against bankruptcy a few companies in a certain sector that are clearly unable to produce a product efficiently enough to sell on the free market. But to refute the huge mistake that Donald Trump is making right now, we don't need to go far back in history, to the times of Adam Smith, David Ricardo, Frederic Bastiat, and Jean-Baptiste Say. George W. Bush managed to impose tariffs on steel imports in 2002. The results were so horrific that he was forced to repeal them the very next year.
Only when the individual has the freedom to trade freely can a country achieve sustainable economic growth and make its citizens richer. Any interventions by politicians and bureaucrats in the principles of the free market limit the freedom of the individual and lead to inevitable negative economic imbalances in the future.
